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Imposing Renewable Energy Surcharge on Imported Fuels

Nepal’s current fuel crisis is a mockery to its abundant indigenous energy sources. Rising trade deficit of petroleum products amounting to 14 to 18 percent of the total imports in recent years is proof of how we are mismanaging our energy supplies. And, if we were not reminded enough of this worrisome dependence, our energy vulnerabilities have become loud and clear thanks to the unofficial Indian blockade. Going by the energy manifestos and promises of our big and small political parties, Nepal would have been an energy surplus country by now even if a quarter of their promises had been realised. But our short-lived governments have never been able to plan anything tangible with long-term goals in mind. For some years now, it has been a tradition of all the governments to declare an energy crisis along with some plans to address it. But their temptation to resolve the energy crisis during their tenures surprise industry experts, and the media often lampoon them. With the current trajectory of growing energy demand in the country, our coming years will be no different unless we put real efforts to invest in domestic energy production. Serious thinking with clear vision can gradually shift the country away from a petroleum-led economy towards home-grown, sustained energy.

Global examples

Unlike in the 1980s, countries today are still continuing to boost their investment in renewables even in the face of cheaper oil. This is what economists call ‘energy security’, which the International Energy Agency (IEA) defines as the uninterrupted availability of energy sources at an affordable price. Global geopolitics and cartels affect oil supplies more than the simple economics of demand and supply. And, with the outlook of growing energy demand in emerging economies like India and China in the coming decades in the face of depleting oil reserves, continued reliance on foreign imports is risky for oil importing nations. Furthermore, economies of scale are driving the cost of renewable energy technologies down, tempting countries to invest in these ‘new technologies’. China recently unveiled its target to add 20-GW of wind power installations and 15-GW of photovoltaic installations in 2016 alone, with a goal of making non-fossil fuel’s share of total energy around 20 percent by 2030. This year it also started adding a renewable energy surcharge on electricity generated from coal-fired plants to boost investments in renewables.

Nepal’s energy crisis and the current spell of a low oil era present a good opportunity for the country to push for more investments in domestic production. A renewable energy levy on petroleum imports can create such fiscal savings needed to invest in the sector.

Such additional levies on oil imports while the price of oil is low, rather than making such adjustments when the oil price is already high, would hurt consumers less. The government can get away with less criticism and political backlash than it normally gets.

Multiple Benefits

Nepal’s import of major petroleum products increased to 1,209,187 kilo litres in the last fiscal year from 374,198 kilo litres in 2005. It is estimated that a 12 percent annualised growth will be witnessed on these imports for another five years, so an additional surcharge of 10 rupees per litre alone can yield over Rs76 billion, equivalent to the cost of building five hydropower projects of the size of Madhya Bhote Koshi (102MW).

Nepal imported 259, 299 MT of Liquefied Petroleum Gas last year. A simple computation of an additional levy of 100 rupees a cylinder results in a saving of almost two billion Nepali rupees. This equates to the money the Nepal government roughly spent last year in subsidising over 150,000 small renewable energy technology installations in the country that will stay for another 15 to 20 years to come. This sheds light on the potential savings a few rupees of additional levy on petroleum imports could yield. The government can use these savings in complementary sectors. The switch to a greater share of renewables will not only bring favourable trade implications with potential decrease in oil imports, it will also—as an analysis by the International Renewable Energy Agency (IRENA) indicates—start to have ripple effects with improved energy security to achieve multiple socio-economic targets due to greater reliance on indigenous sources. The latest report ‘Measuring Energy Benefits: Measuring the Economies’ by IRENA released this year provides compelling evidence on the impact of renewable energy deployment on welfare. It points out that the ability of renewables to stimulate economy, improve welfare and boost employment is three to four times larger than its impact on GDP.

However, Nepal’s dilemma is different. Any upward adjustments on petroleum products are not only difficult, but it would be easily criticised as an insensitive move to the already supply-constrained people who have been hit by one tragedy after the other. So assuming that the government resolves the Madhesi issue and that the petroleum imports normalise, Nepal Oil Corporation should be able to set its tariffs right to make some savings. Even the consumers need to be ready to take some pain in the short run for long-term gains. Unless we scale up our investments to exploit a variety of home-grown generation to the scale needed to reduce petroleum imports, regular episodes of energy crisis will likely continue and further erode the economy. The need to alter this trend is long overdue